Many times over the years I’ve been buying and
selling homes as a real estate investor I have used a lease option agreement as a useful alternative to an outright sale. When I meet prospective buyers who are very interested in a property I have for sale but they need more time to qualify for a mortgage or to rebuild their credit, and I’m considering how to sell my home to them so that it works for me, too, that’s when I suggest a Lease Option Agreement. Most people are not familiar with
lease option agreements, so I usually find myself explaining how it works and why it can be a good solution.
The other thing to know is that real estate agents don’t usually have much information about lease option agreements because it can delay their commission or sometimes eliminate it entirely. So don’t expect your real estate agent to give you advice or provide a form for you to use. You will need to have a lawyer draft a lease option agreement for you unless you’re working with a seller who provides a form. It’s still a good idea to have a lawyer look over any form you intend to sign.
So, how does a lease option agreement work? Well, it is basically a lease on the home with an added benefit for the tenant. An “option” is the right to purchase the home at a specified price on or before a certain date. A lease option agreement is a lease that includes an option as part of the lease. The agreement may require the tenant to pay an option fee up-front, at the time the lease is originally signed, or it may require an addition to the monthly lease payment, which additional amount serves as the option fee. When a landlord gives a tenant the right to purchase the home at a certain price by a certain date, the landlord is making a commitment to hold the property for the tenants regardless of what happens to the real estate market. The landlord is obligated to sell the home if the tenants choose to buy it. But the tenants are not obligated to buy it at all. That is why the tenants pay a fee for the privilege, for the right. An option is a legal right that has value over a certain period of time, usually one year or sometimes two years. All the money paid as an option fee goes toward the purchase price of the home, but it is not refundable if the tenants decide not to close the sale transaction.
I have found that a lease option agreement can work well for me and for my buyers when we need to be creative in order to make the transaction work for all of us. It’s a practical solution when I’m considering how to sell my home to interested buyers.